The Smoke and Mirrors Behind Balanced-Budget Rhetoric

August 14, 2015

Cormac Close

Governors are proud of their balanced budgets. If you drank a shot every time one was mentioned in that August 6 Fox News GOP debate, you would have been in for a painful Friday. Of course, every state’s constitution (save Vermont’s) requires a balanced budget. The surprises are in the methods they used.

There are few things more creative than a state government in dire financial straits, which is to say most of them. States are well versed in all manner of financial chicanery, from simple accounting gimmicks to pushing off payments. These methods range from silly, such as New Jersey Gov. Chris Christie booking extra revenue after selling larger bonds than necessary, to the downright dangerous as states let infrastructure collapse.

Yet all these measures have one thing in common: they make the problem worse. By covering up for a budget shortfall this year, governors are dragging their states into a vicious cycle of crippled budgets and expensive coverups at the expense of their constituents.

Accounting Gimmicks

To facilitate poor state financing, states rely on equally inept accounting. Instead of relying on the professional accounting standards most corporations at least pretend to follow, states often use “cash” accounting. Under this system, states can ignore costs until they come due and investments until they pay off.

This is the root of numerous accounting gimmicks. These gimmicks fall into two general categories. One involves circumventing laws against borrowing money and then pushing payments into the next fiscal year. That typically involves raising funds from projects that can borrow, such as New Jersey’s Clean Energy Fund, in order to feed the state’s operating budget or “general fund,” which can’t borrow. The second, procrastinating on payments, is usually more complex but is, in the end, futile.

Privatization

Privatization is among the most dangerous short-term fixes. Conservatives often tout privatization – converting government assets or functions over to the private sector – as a way to capture some of that good old private sector efficiency. Whether that is in fact true is dubious, but in practice privatization often means auctioning off state assets for some quick cash. Toll roads and state parkland are what has classically been privatized, though Ohio Gov. John Kasich pioneered prison sales. Wisconsin Gov. Scott Walker plans to sell the state’s power and heating plants without a competitive bidding process.

Privatization schemes have also been used by desperate cities to raise money. Cities often sell water systems, but Cincinnati and Chicago saw parking prices skyrocket after selling their parking meters to banks in exchange for a onetime payment,

But the sales don’t stop at physical assets. Three Republican controlled states – Illinois, Indiana, and of course New Jersey – privatized their state lotteries for an upfront fee. Meanwhile, states have often borrowed against the future proceeds from legal settlements, most famously the 1997 Tobacco Master Settlement won against cigarette manufacturers. Under Christie, the state of New Jersey has come close to selling off the entirety of the 1997 settlement to Wall Street investors. These acts cripple the government’s ability to cover future expenses, but hey, the government’s cash accounting doesn’t include those.

Deferred Maintenance

An even more dangerous way governors balance their budgets is by skipping maintenance on infrastructure. Governors, hungry for budget cuts, often pretend that upkeep on their state’s water systems, transportation networks, roadways and bridges are like any other kind of spending. This conceit could not be farther from the truth. If you don’t pay for them to be filled, potholes and cracks in bridges will still be there next year, growing ever so slightly. Each year that governors put off maintenance is another year’s worth of maintenance that needs to be done. That is, unless we are content with impassable roads, derailed trains, collapsed bridges and busted pipes.

The cost of this “deferred maintenance” is more than just the cost of maintenance; outdated and failing infrastructure costs time and money. The American Society of Civil Engineers estimates the national cost to our infrastructure this decade to exceed $3.1 trillion. But with the inept accounting of most states, all we see in state budgets are the savings from spending less on maintenance this fiscal year.

When Republican governors promise to bring their budget-balancing skills to Washington, it is worth knowing that those skills extend well beyond “making the tough decisions.” More often than not, the skills governors use to balance budgets are number-fudging and willful blindness. The United States faces challenges that simply cannot be papered over, and the last thing we need is a president who will try to do just that.

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